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Economy Issue 2019

Populist? No

TCA Srinivasa Raghavan is a senior journalist and columnist. He is the author of Dialogue of the Deaf: The Government and the RBI
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Don’t underestimate an understatement

A WEEK AGO, NIRMALA SITHARAMAN, THE SURPRISE choice as Finance Minister, presented her first Budget. It has left everyone both puzzled and unhappy. Puzzled because it is such a souffle. Unhappy because when the stock market opened on the Monday after the Budget weekend, it dropped by 1,200 points. Overall, the Budget is unlikely to lead any dramatic improvement in sentiment in the country.

In its wake, when the economists commented, they strongly resisted her proposal for the Government to borrow in foreign currency. When the farmers looked at it, they found nothing of consequence in it for them. When industrialists looked at it, they also found that there was little in it to make them start investing again. Ditto the middle classes and the rich. The super-rich, however, got an extra surcharge. And everyone got higher fuel prices.

But that said, there is the other side of the Budget: it is entirely consistent with the style of the Modi Government so far. Thus, it has kept its focus on making life more comfortable for the citizen by simplifying processes and procedures. This is evident from its attempts at fine-tuning the government-business-citizen interface. Nor did her speech, unlike scores of past Budgets, put the Government at the centre of all things. It was instead a litany of the achievements since 2014. In that sense it was an intensely political Budget, aimed at talking points aimed at the taxpaying voter.

The optics were nice. It made a radical departure from the last five Budgets in one major respect: until now the Government was unwilling to be seen as a pro-private sector government. But this is no longer the case. We will help the private sector, said Sitharaman with emphasis that bordered on conviction if not action on the ground. She also clearly announced her Government’s intention to stop playing Robin Hood, a process that had begun in 1971.

A major step in this direction was the lowering of the corporate income tax rate to 25 per cent for all firms with a turnover of Rs 400 crore. This, Sitharaman said, covers 99.3 per cent of the firms in the country. But these firms pay only 30 per cent of the taxes collected from corporate India. Nevertheless, this is a highly significant departure from the past that bodes well for the future of investment which has been very sluggish for almost a decade now—provided some other huge problems are removed. Hopefully, also, it lays to rest forever the ghost of Rahul Gandhi’s 2014 jibe that the Modi Government was a ‘suit-boot ki Sarkar’.

BUDGETS HAVE TO be judged on how they plan to increase four basic things: revenue for the government, which is the most important metric; savings by the households; investment by businessmen; and consumption by citizens. Viewed from this perspective, the Budget falls short on three counts.

It doesn’t do enough to increase government revenues or savings or consumption. As far as these three things are concerned, it is a treading-the-water Budget and much an ‘ease-the-process’ Budget that almost absent-mindedly announces some tax relief for the purchase of electric vehicles. The relief is around Rs 1.5 lakh, which is not a small sum. But what it will achieve remains to be seen. Likewise there are some concessions aimed at lowering the interest rate on affordable housing. But once again given the problems that the non-banking finance companies are facing and the reluctance of the banks to lend to low-income people, how far this will help in reviving the sagging real estate industry is open to debate. Not much, probably, at least not for a few years.

One aspect of Modi’s style which has been ignored is that he is trying to shift the emphasis from equity to efficiency all the while not appearing to do so

The Finance Minister has also paid a lot of attention to start- ups. She announced a host of processes-easing in respect of taxation of start-ups. But once again, these do not fit into the four criteria listed above. Instead they are administrative in nature and could have been announced outside the Budget as well. Indeed, this can be said of most of Part A of her speech which have little or nothing to do with the economic aspects of the Budget. That, perhaps, is its central weakness because it is the first Budget of the National Democratic Alliance Government’s second term under Modi. In fact, in some areas like increased Customs duties on a whole range of imports it regresses to the pre-1991 era. The question is whether the numerous departures from the practices of the past—though not policy—will be enough to get growth going again. The need is for a massive investment boost which this Budget might not trigger.

THE GOVERNMENT FACES an extremely difficult fiscal situation, comparable to 1966 and 1991. What’s worse, the economy is in a very bad shape. At the heart of the problem lies low overall demand which is made up of three components: consumer demand, corporate demand and government demand. This Budget has not addressed any of these adequately. Perhaps it cannot. Since tax revenues either through direct or indirect taxes did not meet their targets last year and don’t look like they will this year, the only way the Government can increase its expenditure is by borrowing more. But Government spending is currently constrained by Modi’s determination to keep it below 4 per cent.

The Budget says the Government will now borrow more from foreign markets. This is the reason why the fiscal deficit has been kept so low. But this has proved to be a very slippery slope for scores of other countries, the worst examples of which were (and are) the ones in Latin America. Not one of them escaped the vicissitudes that follow government borrowing in foreign currency, namely, dollars.

As to consumption, it has been clear for some time now that individuals, driven by static salaries but increasing costs, have begun to defer purchases. This can be seen in a number of metrics that have slowed down, such as car sales. One way to encourage individuals to spend more would have been to increase the amount of money in their pockets by reducing the tax burden. The Budget does attempt this but only for the low- income category, that is, those who earn up to Rs 5 lakh a year. This will not make much of a difference to the drivers of growth. Low-income people do not spend much on the things that drive growth, especially in the absence of credit.

Then there is the problem of private investment which has declined sharply in the last five years. Despite the Government’s best efforts so far, it has not recovered enough to shoulder its share of the burden as a prime driver of economic growth. There are several non-Budget, non-tax reasons for this. I have been saying for a long time now that India is the only country in the world where politicians have made all three factors of production— land, labour and capital—very expensive. Indeed, taken together, the three are costliest in the world. To make things worse, there are international problems that are depressing private investment, which the Budget cannot tackle.

However, if the Government spends more on roads, it will automatically create demand for cement and steel, which is produced by the private sector. The Government can also lower the corporate tax rate as promised in 2014 to 25 per cent for all companies. But while there is no guarantee that reducing corporate tax rate will definitely lead to increased investments, it would be a good first step. Much more needs to be done.

Modi has sought to fix the capital problem first because labour and land reforms both come with millions of loseable votes. The Modi Government has introduced changes that seek to squeeze more out of scarce capital

Finally, there is the question mark about the integrity of the Budget numbers on revenue and expenditure. The inconsistencies seem to be many and this is doubtless a bad thing. But it is also worth remembering no Budget in the last 35 years has been entirely free of this defect. The simple truth is that governments routinely overstate revenue and understate expenditure. Not just in India but all over the world.

The reason: democracy, development and debt. Everyone is a prisoner of the bond markets and in that sense at least nothing much has changed since the first sovereign borrowed money from the sahukaar.

BUDGETS, AS WILLIAM Shakespeare said, have the same problem as people: the good that they do are soon forgotten—often within a week of their being presented—but the evil they do lingers on. What remains in public memory, however, apart from the specific real or perceived inequities that a budget heaps on people, is the style of economic governance of the prime minister of the day because finance ministers are forgotten even sooner than their budgets. Do you, for example, remember Sachin Chaudhuri? No? Well, he was the guy who devalued the rupee by a whopping 36 per cent in 1966. It was a negative decision, so Indira Gandhi distanced herself from it although it was she who had agreed to it with the World Bank three months earlier but not informed the finance minister about it! Or do you remember VP Singh as Finance Minister? He was the one who first cut income-tax rates in 1985. But only his Prime Minister, Rajiv Gandhi, is remembered.

As I had pointed out in an earlier article in this magazine, in the years to come, just as Indira Gandhi is remembered for changing the rules of the game, Narendra Modi is also likely to be remembered for doing the same thing because he has reversed the Congress policy of free lunches for the voter. It is a different matter that direct taxpayers constitute barely 1 per cent of the voters. All, however, pay indirect taxes, regardless of their incomes. But politicians hate to talk about this and focus on the rich-poor aspects of a Budget.

Again, as I had mentioned, the other aspect of Modi’s style which has been ignored is that he is trying to shift the emphasis from equity to efficiency all the while not appearing to do so. This is a big change from the Congress’ post-1970 approach which made all three factors of production the costliest in the world and thus made the Indian economy amongst the most inefficient in the world. It is because of this that Modi’s Make in India has failed and fresh investment has not happened. It is also because of this that industries relocating out of China have gone to Bangladesh, Vietnam and the Philippines instead of coming to India. It makes no commercial sense to come here.

And as has been pointed out by me, Modi has sought to fix the capital problem first because labour and land reforms both come with millions of loseable votes. The Modi Government has introduced changes that seek to squeeze more out of scarce capital. If these incentives and disincentives are not tampered with by successor Governments—for example, the bankruptcy laws—the Indian economy will start using capital far more efficiently than it has since 1972. And once it does that, the cost of capital will begin to come down.

That said, there have also been the quixotic aspects of Modi’s approach to economic problems. Demonetisation and rushing into the introduction of the Goods and Services Tax (GST) before the technological and administrative systems were ready for it stand out. His insistence that the GST on 62 per cent of the products be kept at zero led to the remaining things being taxed at rates far higher than they would have otherwise been.

Overall, therefore, it would not be wrong to say that Modi’s style of economic governance, though largely well-intentioned, has also been very political—mind you, not populist—and whimsical. In mitigation one could say that when faced with a near-empty fisc and massive agenda, he chose the less harmful way of financing Government programmes by collecting taxes rather than printing notes, which is what the Congress would have done.

In conclusion, if we want to be generous, we can say this was only the first Budget of Modi’s second term and therefore some tentativeness was to be expected. But that raises the question: Why is a Prime Minister who is so sure-footed on politics so unadventurous in economics?

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